European refining profits fall to three-year low

European refineries are shutting or converting to storage hubs at the fastest pace since the 1980s as demand drops and US, Russian and Middle East competition intensifies.

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By LANANH NGUYEN

Bloomberg

European refiners are already enduring the worst slump in
decades. A growing heating-oil glut is about to make it
worse.

Profit this year will be the lowest since 2011 because of
competition from heating-oil imports, according to Wood
Mackenzie, a consulting company. Inventories in
Amsterdam-Rotterdam-Antwerp, the center of European trading, are the highest
for the time of year since 2009, according to data from PJK
International BV, a researcher in the Netherlands.

Were looking at very weak margins, Jonathan
Leitch, a senior analyst at Wood Mackenzie in London, said by
phone on Aug. 21. Summer has been disappointing. If you
think that hasnt been great, wait until you get to
autumn and winter.

European refineries are shutting or converting to storage
depots at the fastest pace since the 1980s as demand for oil
products dropped for seven years and competition from US,
Russian and the Middle Eastern supplies intensified.
Seventeen plants closed in the past six years, says the
International Energy Agency, the Paris-based adviser to 29
nations.

The profit for a refinery in the region able to
maximize production of higher-value fuels averaged $1.27/bbl
from May to July compared with $2.83 in the same period a
year earlier, based on the price of Brent crude, according to
Wood Mackenzie. By December, it will turn into a loss of 80
cents a bbl, the forecast shows.

Lower summer profits combined with winter losses mean the
refining margin in the region will average 40 cents for 2014,
less than half the profit last year and just 10% of the level
in 2012, according to Wood Mackenzie.

Its very difficult for many European refiners to
compete, Ehsan Ul-Haq, a senior market consultant at
KBC Energy Economics in Walton-on-Thames, England, said by
phone on Aug. 21. Part of the refining capacity has to
be closed.

Eni SpA, Italys largest oil
company, is negotiating with unions to shut more than half of
its 774,000 bpd of refining capacity, putting more
than 3,500 jobs at risk.

The sector employs about 100,000 people, according to
FuelsEurope, an industry group.

About 1.5 million bpd of capacity will need to be closed to
eliminate the continents glut, Patrick de la
Chevardiere, CFO of Total SA, Europes biggest refiner,
said last month. That would bring the cumulative reduction in
Europes developed economies to 2.8 million bpd more
than the fuel consumption of Germany from a total of 15.9
million at the start of 2008, according to Bloomberg
calculations based on IEA data.

Fuel Surplus

Gasoil stockpiles in the Amsterdam-Rotterdam-Antwerp area
almost doubled in the four months to Aug. 21 to 2.74 million
metric tons, according to PJK data.

Front-month gasoil futures slumped to a 14-month low of
$852.50 a metric ton ($2.278/gal) on Aug. 18 on the ICE
Futures Europe exchange and settled on
Aug. 21 at $859.25. The contract is used in Europe to derive
the price of oil products called middle distillates,
including heating oil, diesel and jet fuel. Gasoils
crack, or premium to European benchmark Brent crude, narrowed
13% this year to about $14/bbl.

Margins might improve in September and October as plants halt
in Europe and Russia for maintenance, shutting about 1.1
million bbl of capacity on average, KBC estimated. While cold
temperatures might spur higher consumption and erode the
heating oil surplus, I dont think that we will
see significant improvement in demand, said Ul-Haq.

Markets Shrink

Daily fuel consumption in the regions most-developed
economies fell to 13.22 million bbl in May, down 3.2% from an
average of 13.7 million last year, according to IEA data
published Aug. 12. This years drop in consumption is
smaller than heavy falls over the past three
years, the IEA said.

Refiners profits tend to peak in the summer as
vacationers and truckers travel more. Margins from making
gasoline were lower this year as production surged in the US,
northwest Europes main export market.

US gasoline production climbed to a record 9.84 million bpd
in the week ended June 13, according to data from the US
Energy Information Administration. The country imported
550,000 bpd of gasoline on average this year, compared with
1.1 million in 2006, according to EIA data.

US Advantage

North American refiners have the advantage of abundant
supplies of cheap oil produced from shale deposits. West
Texas Intermediate, the US crude benchmark, traded at a
discount of almost $9/bbl to Brent on Aug. 21 on ICE.

The spectacular renaissance in US refining has
combined with a surge of exports from Russia, the IEA said in
a June report. Companies are refining more crude after
President Vladimir Putin pushed them to spend billions of
dollars modernizing plants. Output of diesel and fuel oil
were the highest in June since at least 2009, Energy Ministry
data show.

Middle Eastern refining capacity will rise 2.2
million bpd by 2019 as large new projects come online, the IEA
said. Feedstock costs are much lower in
the Middle East and most of the new refineries are very
sophisticated, making it hard for European plants to
remain competitive, Ul-Haq said.

Imports will expand Europes glut, Steve Sawyer, an
analyst at FGE, an energy consultancy, said by phone from
London Aug. 20. The region imported 1.2 million bpd of gasoil
and diesel in April, up 34% from a year earlier, according to
IEA data.

When you look at Europe, its caught in this
pincer, Sawyer said. Its pressure from all
sides. The pressure is going to continue.

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